Hard truth: Report says 75% of VC-backed startups fail

Over the years, I’ve covered hundreds of startup closures, from high-profile flameouts like HomeGrocer.com to smaller lesser known upstarts that never really got off the ground. Now, according to research from Harvard Business School lecturer Shikhar Ghosh, there appear to be a lot more failures going on than we ever learn about.

Ghosh’s research indicates that as many as 75 percent of venture-backed companies never return cash to investors, with 30 to 40 percent of those liquidating assets where investors lose all of their money. The Wall Street Journal this week reported on Ghosh’s findings, which is based on research of more than 2,000 venture-backed companies that raised at least $1 million from 2004 to 2010.

Ghosh tells the Journal that VCs “bury their dead very quietly,” which certainly has been my experience on the beat over the years.

Try asking a VC about failed companies in their portfolio, and you’ll usually get a response about the successes. Dead companies are quickly removed from the Web site’s of venture capital firms, never to be spoken of again.

Startups are hard, and it certainly takes persistence, smarts and a bit of luck to turn any new venture into a success. It also takes … failure. Seattle is littered with entrepreneurs whose first ventures hit the wall or didn’t meet investors’ initial hopes.

Part of the entrepreneurial process is picking oneself up from past mistakes, learning from them and moving on. That’s always been the case. But Ghosh’s findings indicate that startups may be just a bit harder than we thought.

The report comes a few months after the Kauffman Foundation released results which indicated that 62 of 100 venture funds failed to exceed returns available from the public markets, after fees and carry were paid.

[Editor’s note: We can’t promise startup success. But bouncing back from failure will be one of the topics on the agenda at GeekWire’s Startup Day this Saturday. More details and full agenda here].

John Cook is GeekWire's co-founder and editor, a veteran reporter and the longest-serving journalist on the Pacific Northwest tech startup beat. Follow him @johnhcook and email john@geekwire.com.

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Comments

http://twitter.com/Seattle_Startup Seattle Startup

This shouldn’t come as a surprise. Investing in VC Funds makes no sense; running them makes tons of sense. Depsite the horrible (or often non-existent) returns to investors, the managers of VC funds live high on the hog.

Report after report underscores this conclusion…yet folks still give $$ to VC funds for some weird reason.

Given how much further down the risk curve VC’s have gone – angels today really put up all the risk capital and VC’s invest in things that start-up banks used to – this is really is damning that over 50% of VC investments fail. They’re investing in such late stages these days that they should get it right 90%+ of the time. The root cause is a grim reality I learned several years ago: Most VC’s just aren’t that smart and probably got lucky early in their careers. That’s not all of them, but certainly a majority.

Guest II

I’m not sure what the point of this is. A VC is one type of investment vehicle which targets one type of investment. It isn’t a catchall for investing nor, just because the failure rate is high, should it be vilified.
Most businesses aren’t a fit for VC funding. They use other sources that are more appropriate for their situation. They also still have very high failure rates. In fact very few businesses of any type last longer than 5 years.

http://twitter.com/stannius Steve Dupree

Maybe I’ve read too much Paul Graham, but I’m surprised the failure rate is only 75%. I would expect a failure rate of 90%+. The reason VC’s talk about their successes is because that’s the whole point of their investing – the vast majority of their profit comes from a tiny, tiny percentage of their investments.

rick

and yet VC firms continue to insert their heads firmly into the rectums of new tech ventures in 2014 – that’s all they seem to know, all hoping for the next friendbook.

wangkon936

News flash! 80% of businesses fail, with or without VC financing. VC funding is like playing the roulette table. You spread your chips around the table and see which numbers consistently hit pay dirt. Profits gained from the 25% successes make up for the losses in the 75% failures. That’s why people still do VC. The 25% generates enough value to make it worthwhile.